NIO: More Justified Pessimism (NYSE:NIO)

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Compassionate Eyes Foundation/David Oxberry/OJO Images Ltd

Last month, I detailed how Chinese electric vehicle manufacturer NIO (New York Stock Exchange:NIO) announced another disappointment with its September delivery figures. Despite expectations of a massive increase in deliveries in the second half of this year, the The company has consistently had production problems that have left huge holes in the growth story. On Tuesday we received the October delivery report of the company, and the result was even worse than last month’s bad news.

For the tenth month of the year, NIO delivered 10,059 vehicles. That represents a growth of more than 174% over the period last year, but the company has two more vehicles available for sale this year. October of last year also saw a dramatically lower figure due to production upgrades and restructuring efforts that had the factory downstairs for more than two weeks from September 28 to October 15. The following graph shows the trend of deliveries each month for the last three years.

Monthly Deliveries

Monthly NIO deliveries (company releases)

Furthermore, the figure for October is an increase of just 7 units over July, the first month of the third quarter, despite two factories that are supposed to be ramping up sharply at the moment. NIO has also released a new model since then, the ET5, which sold more than 1,000 units in October. Management provided the following statement as to why the results were not as high as expected:

Vehicle production and delivery were constrained by operational challenges at our plants, as well as supply chain volatilities due to COVID-19 situations in certain regions of China.

As I’ve been detailing for the last two years, there seems to be a problem for NIO basically every quarter. COVID issues, supply chain issues, or production upgrades seem to shut down facilities at least once every few months. A separate report released Tuesday morning discussed how both factories have been facing closures and if they continue, November deliveries will also face a significant challenge.

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More than a year and a half ago the company and its partner announced an agreement to double the annual production capacity to 240,000 units. Furthermore, NIO has started production in its own factory with a target of 10,000 units per month in a fairly short time frame, and the company is still nowhere near 15,000 deliveries per month. Plans to reach at least 30,000 deliveries per month by early 2023 will likely need to be pushed back a bit.

Earlier this year, NIO’s goal was to deliver 100,000 vehicles in the second half of this year. During the first four months of this period, the company has not even reached 42,000 vehicles. While this is a process that is supposed to increase over time and therefore November and December should be the best two delivery months, it seems obvious that the 100k goal will not be achieved. Plans for substantial growth in 2023 also face headwinds from the expected end of the Chinese subsidy for electric vehicles, as well as recent price cuts by Tesla (TSLA) to stimulate demand for its own Shanghai-made vehicles.

Interestingly, NIO will report third quarter results next Thursday, November 10. That’s a bit surprising, given that some recent quarters have seen their reports arrive in the last month or even the last week of the following quarter. At this point, targeting will be nowhere near the nearly 70,000 units needed to reach the second-half goal, but can NIO get to 50,000 at this point? That in itself could be quite bullish, so perhaps investors should brace for guidance in the low to mid 40k range.

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As of Tuesday, analysts had expected $1.80 billion in revenue for the third quarter, but that figure was supposed to rise to $3.05 billion for the final three months of the year. Maybe we’ll see some cuts in estimates next week, but I don’t see how NIO can get more than $3 billion unless there’s a dramatic improvement in production pretty soon. The situation is even more complicated because NIO translates its results into dollars using the Yuan (or Renminbi) rate based on the last day of the quarter. As the chart below shows, the US dollar has rallied against the yuan this year, which will drag the translated revenue number down a bit from quarter to quarter.

dollar strength

Dollar/yuan exchange rate (CNBC)

As for NIO shares, they closed Tuesday at $9.71. They are very close to their 52-week low of $8.38, which is wildly lower than the stock’s early 2021 peak of nearly $67 a share. It doesn’t help that the 50 day moving average is at $16 but falling which could build resistance if stocks start to rally. The average street price target is currently $28.53, but that number itself has more than halved in the last 12 months. Analysts are extremely bullish, but this week’s news may change that sentiment a bit.

In the end, October was another very disappointing month for NIO. The Chinese electric vehicle company saw more production problems, limiting vehicle deliveries to just over 10,000. With COVID and supply chain issues continuing, it is now clear that hopes of 100,000 deliveries in the second half of the year or 30,000 units a month in early 2023 must be significantly lowered. Without some decent guidance next week or some concrete statements that these ongoing production issues can be quickly fixed, this stock could easily hit a new 52-week low in the coming weeks.

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